Banks must plug £120bn black hole

Updated: 
Andrew BaileyBanking watchdog the Prudential Regulation Authority (PRA) has told banks to bolster their balance sheets by £120bn within seven years.

In a report called Raising Capital Standards, the Bank of England estimates the financial black hole of banks and building societies to be £120bn. It warns that investment firms may be a further £43bn short.

And it wants banks and investment firms to find more than half the missing cash - 56% by 2015. After that, the Bank of England and PRA are consulting on whether different forms of security might be used to count against the balance sheet black holes.

2019 deadline

It says: "It is estimated that deposit-takers in the United Kingdom will need to raise, in aggregate, approximately £120bn.... This capital will need to be raised over the course of the implementation period from 2014 to 2019."

"The investment firms regulated by the PRA are estimated to have, in aggregate, a capital shortfall of between £36bn and £43bn." It says that by lowering their risk they may only need to find £27bn to £29bn to plug that hole.

Andrew Bailey, deputy governor for prudential regulation at the Bank of England and chief executive of the PRA said: "Well capitalised and resilient firms are crucial for ensuring financial stability and supporting UK growth.

"The PRA has already acted to increase both the amount and quality of capital held by firms, reflecting our determination to improve the stability of UK firms after the crisis. This has put UK firms in a good position to meet the new requirements whilst continuing to provide banking services and support lending to the real economy."

Plain English

In a statement that reads like gobbledegook, the PRA said: "Under the current regime Pillar 2A can be met with any regulatory capital. The PRA is proposing that firms should meet this requirement with at least 56% CET1 capital from 1 January 2015, thus bringing the capital quality of Pillar 2A in line with that of Pillar 1.

"The PRA is consulting on whether from 1 January 2016 onwards the Pillar 2A requirement should be met with CET1 only or a different combination of capital. The final form of the new capital regime emphasises that Pillar 2 capital requirements should be met by fully loss absorbing capital, thus by CET1."